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Every earnings season, I go through all stocks that are scheduled to report for the upcoming week and highlight those that look promising on my printed sheet.

An often overlooked detail with earnings trades is picking the right strike prices. This is especially true with such options strategies as the 'reverse iron condor' and the 'long put butterfly' spread. To a lesser extent, the 'straddle' and 'strangle' strategies also require a good sense of what strike prices to choose, but they are more cut-and-dry.

Today, I was looking at Green Mountain Coffee Roasters (NASDAQ:GMCR), which reports earnings this week. I ran a few trades-- using the 'reverse iron condor' strategy-- through my trade calculator, and immediately noticed that it did not make sense to place this specific trade. Why? It was because the strike prices did not align at all. Essentially, what I am saying is that the trade was no longer neutral, which is the premise of the 'reverse iron condor' strategy to begin with.

The 'reverse iron condor' has four (4) legs. Here is how the trade is placed accurately. (For example purposes, I will only use one contract for each leg):

  • Buy one (1) out-of-the-money put option
  • Sell one (1) out-of-the-money put option (LOWER STRIKE)
  • Buy one (1) out-of-the-money call option
  • Sell one (1) out-of-the-money call option (HIGHER STRIKE)

Things can change by the time Green Mountain Coffee Roasters is ready to release its earnings, but here is an example of why I decided to pass on this trade:

To execute this trade, the strike prices have to be wide enough to justify the cost. This is where the problems began, as these profit/loss charts will show. At the time of picking the strike prices on my trade calculator, Green Mountain Coffee Roasters was trading at $48.50/share. This specific trade was using the most narrow strikes as possible:

  • Buy (10) GMCR May Week 1 $47.00 put options
  • Sell (10) GMCR May Week 1 $46.00 put options
  • Buy (10) GMCR May Week 1 $49.00 call options
  • Sell (10) GMCR) May Week 1 $50.00 call options


Option Requirement$0.00
Total Requirements$830.00
Estimated Commission$50.00

Current Price: $48.73

PriceProfit / LossROI %

Some may wonder, "hey, what is wrong with a 20% return on investment?" The main issue here is that a 'reverse iron condor' spread is an expensive trade to place in terms of commission costs because it has the four "legs" to it. Even though you can let one expire worthless when you are ready to close the position, this is still a trade that requires "two" trips-- the buy to open the position and then closing the position. The above example shows a maximum (very important) return of $170.00, while your debit to place the trade is $830.00. After commission costs, you will be lucky to get 12%. Yes, you can use a cheaper broker, but getting the order filled and reliability / execution are also considerations to keep in mind.

Now, we can see what happens if I widen the strike prices, while also taking on more risk:

Please note a dirty little trick that happens here, which is when certain companies have options that are in $2.50 increments. Such is the case with Green Mountain Coffee Roasters-- when after the $50.00 strike call option, the next available strike to use is $52.50. This is a major issue and should have you reconsider whether it is a good idea to place the trade anymore.

50.00GMCR120519C000500003.75Up 0.203.753.801,1593,909
52.50GMCR120519C000525002.81Up 0.222.762.828124,574
55.00GMCR120519C000550002.03Up 0.161.992.046602,929
57.50GMCR120519C000575001.45Up 0.151.391.464464,552
  • Buy (10) GMCR May Week 1 $45.00 put options
  • Sell (10) GMCR May Week 1 $44.00 put options
  • Buy (10) GMCR May Week 1 $52.50 call options
  • Sell (10) GMCR May Week 1 $55.00 call options


Option Requirement$0.00
Total Requirements$1,100.00
Estimated Commission$50.00

Current Price: $48.73

PriceProfit / LossROI %

It is easy to spot the problem with this trade. It is bullish biased only, because of the misalignment of the strike prices. The jump from the $50.00 to the $52.50 strike call options, with no $51.00 in-between, makes this a no-trade. You will see this type of situation from time to time. When you do, it is best to not make the trade, as you are literally at the mercy of the stock price going up only. This is an extremely dangerous way to trade earnings, when one-sided.

Here, we can look at a trade with the assumption that it will make a significant move up or down. This is extremely risky, and I would never recommend doing this, but I do know people that have the moxie for this type of risk:

  • Buy (10) GMCR May Week 1 $40.00 put options
  • Sell (10) GMCR May Week 1 $38.00 put options
  • Buy (10) GMCR May Week 1 $55.00 call options
  • Sell (10) GMCR May Week 1 $60.00 call options

This would be a different story if there were strike prices in the middle between the $50.00 call options, the $55.00 call options, and the $60.00 call options. Unfortunately, there are not. The put option side does not have this problem, as there are $1.00 increments across the board. Here is a closer look at the profit/loss chart and cost of the trade:


Option Requirement$0.00
Total Requirements$1,250.00
Estimated Commission$50.00

Current Price: $47.94

PriceProfit / LossROI %

While it certainly is possible that Green Mountain Coffee Roasters will make a large enough price move to make this trade successful, it is extremely unlikely and presents too much risk. In summary, this specific trade will require around a $9.00 price move, up or down, to profit. No thanks.

As I mentioned earlier in this article, you will find certain trades that simply do not make any sense. When a stock is over $100.00/share, it is common to see the strike prices move in increments of $5.00 to the next strike price. With a lower-priced stock, such as Molycorp (MCP), Cliff's Natural Resources (NYSE:CLF), Mosaic (NYSE:MOS), and others that have $2.50 increments only, please be extremely careful and understand the increased difficulty to profit because of it.

Disclosure: I am long MCP.